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Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. Larry was involved in the growth and development of the secondary mortgage market from its near infancy. After close to 7 years at First Boston, Larry joined Bear... More
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  • Consumption Takes Another Leg Down  1 comment
    Aug 23, 2010 8:11 AM

    Do you increasingly feel that you are not receiving the full story in terms of our overall economy? Do you feel as if the ‘political class’ in Washington is speaking a different language than the ‘working class’ in the rest of the country? Do you scratch your head as to why economic releases are often immediately panned and quickly thereafter revised? (Case in point, the initial release of 2nd quarter GDP on July 30th was quickly thereafter  projected to be halved.) For all of the above reasons, more and more Americans are relying on independent economic research and analysis. Two of my favorites in this camp (aside from Sense on Cents, of course!!) are John Williams of Shadow Government Statistics and Rick Davis of Consumer Metrics Institute

    I referenced Williams’ work in recently writing What Is the Real Rate of Unemployment in the United States?. In that commentary, I referenced Williams as he had stated,   

    That began a lengthy process of exploring the history and nature of economic reporting and in interviewing key people involved in the process from the early days of government reporting through the present.

    For a number of years I conducted surveys among business economists as to the quality of government statistics (the vast majority thought it was pretty bad), and my results led to front page stories in the New York Times and Investors Business Daily, considerable coverage in the broadcast media and a joint meeting with representatives of all the government’s statistical agencies. Despite minor changes to the system, government reporting has deteriorated sharply in the last decade or so. (LD’s emphasis)

    In that very same vein, Rick Davis at CMI is doing similarly spectacular work in capturing and measuring real time discretionary consumer activity. Rick has been way ahead of the curve over the last six-plus months in projecting a double dip in our economy. Those who would like to pan Rick or his work fail to see that Rick’s trendline for the American consumer has been amazingly accurate. What does Rick see now? Are you sitting down? Because it would appear that the American consumer has recently further retrenched. Let’s navigate as Rick writes,

    At the Consumer Metrics Institute we have a unique perspective on the economy. We measure consumer demand on a daily basis, providing nearly two orders of magnitude more resolution than the BEA’s GDP releases. This is like moving from naked eye observations to using a lab-grade microscope. As a result we can see timing relationships that simply can’t be seen in quarterly data.

    Our Daily Growth Index has reached a year-over-year contraction rate of 5%, and it is rapidly closing the gap on the worst contraction rate observed during the 2008 Great Recession:

    Chart

    The current 2010 contraction is now over 215 days old. At the same point during the duration of the 2008 Great Recession, consumer demand was contracting at less than a 1% year-over-year rate. Additionally, during the 2008 Great Recession our Daily Growth Index had returned to net growth after 223 days. From the above chart we can see that the profile of the 2008 contraction and the 2010 contraction are substantially different. The 2008 event was a classic “V” shaped recession. So far this one is not. We have previously suggested that this contraction might be mild but prolonged. We are no longer confident about “mild”. (LD’s emphasis)

    We have previously gained some notoriety for having our Daily Growth Index lead the GDP by a relatively consistent 18-20 weeks during the Great Recession. Does this mean that we expect the GDP a couple of quarters from now to be contracting at rates similar to our current -5% rate?

    ► Our methodologies capture only on-line consumer demand for discretionary durable goods, the most volatile portion of the consumer’s 70% contribution to the GDP. As a consequence we are not seeing the impact of most ongoing governmental stimuli. If governmental stimulus packages can successfully offset the 2010 drop in consumer demand, the GDP might never feel the full weight of the 2010 contraction event.

    ► However, as we have said before, we suspect that consumers are the “800 pound gorilla” in this recession, and their actions (or inactions) will ultimately be felt to a major extent in the GDP.

    By analogy to (American) football statistics, we are only measuring the performance of the starting quarterback for the U.S. economic team. It is possible for a football team to win even though the quarterback is below average — an overwhelming defense and a punishing running game can compensate for a journey-man quarterback — but the performance of the starting quarterback is by far the best predictor of a football team’s final results. The U.S. economy might grow without the U.S. consumer’s support, but only with net exports and/or unsustainable governmental consumption. At the current time the likelihood of the U.S. becoming a net exporter is very low, and unsustainable governmental consumption is simply that: unsustainable.

    It is also helpful to distinguish between “leading” and “predicting”; we have deliberately decided to measure discretionary consumer demand data because it is highly leading, while fully realizing that the volatile data provides amplified signals. Fortunately during the 2008 recession the BEA’s numbers for the full economy eventually matched the discretionary consumer demand portion (that we measure) with embarrassing accuracy. While we know that we are measuring only one portion of the economy — the quarterback in the above analogy — we still feel that those measurements reliably lead the economy as a whole. And they should not be expected to predict exactly what the BEA’s 1937 based methodologies eventually measure — for those portions of the economy that really mattered in 1937.

    As the saying goes: our numbers are what they are. They are pure daily measures of on-line consumer demand for discretionary durable goods. If consumer demand decisions initiate 70% of all U.S. commerce, we would like to measure that demand as far “upstream” as possible.

    If the consumer is in fact the quarterback of our American economy, why does it appear that he is now preparing for a ‘quick kick?’ As Rick states, the numbers are what they are, but as anybody in Wall Street knows, numbers don’t lie. Liars lie.  

    In keeping with the football analogy, is that Tim Geithner over there in his letter sweater holding some pom-poms and a megaphone? While over here it looks like Ben Bernanke has once again tried to spike the Gatorade.

    Larry Doyle

    I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved. 



    Disclosure: no positions
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  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3738) | Send Message
     
    Larry Doyle, your loyalty to the CMI (Consumer Metric Institute by Richard Davis) is admirable, but its lack of backtesting to previous recessions is showing its weakness as a leading indicator this year. On June 30th, you reported the CMI was projecting a -1.5% Q2 & -2% Q3. It's not mentioned in your blog above, but by your metric Q4 should be -4%. These are disastrous results ... even if BEA has major downgrades (again).

     

    It's clear the CMI is not tracking GDP, albeit it got lucky in 2009. Perhaps it is signaling retail sales or durable goods, but cursory comparisons don't stand up there either. Methinx you are watching a narrow tracking of "e-commerce"...

     

    At TrendLines we are watching the leading indicators quite closely at this time, and only about 20% of 'em are reflecting coincident data that mirrors CMI's pessimism.

     

    chart: seekingalpha.com/insta...
    30 Aug 2010, 05:23 PM Reply Like
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